Fitch Expects Fewer Big Banks to Retain AA Credit Ratings

by: Research Recap

Fitch Ratings expects fewer big banks to be rated AA, with global and universal banks and investment banks especially vulnerable to downgrade. In recent days Fitch has downgraded several big banks, such as Lloyds (NYSE:LYG), Royal Bank of Scotland (NYSE:RBS), and UBS (NYSE:UBS).

Fitch has also placed the following ratings on Rating Watch Negative:

  • Bank of America Corporation (NYSE:BAC) –Viability Rating (NYSE:VR) a-.
  • Barclays Bank plc (NYSE:BCS) –Viability Rating aa-; –Long-term IDR aa-; –Short-term IDR F1+.
  • BNP Paribas –Viability Rating aa-; –Long-term IDR aa-.
  • Credit Suisse AG (NYSE:CS) –Viability Rating aa-; –Long-term IDR aa-; –Short-term IDR F1+.
  • Deutsche Bank AG (NYSE:DB) –Viability Rating aa-; –Long-term IDR aa-.
  • The Goldman Sachs Group, Inc. (NYSE:GS) –Viability Rating a+; –Long-term IDR a+; –Short-term IDR F1+.
  • Morgan Stanley (NYSE:MS) –Viability Rating a; –Long-term IDR a; –Short-term IDR F1.
  • Societe Generale (OTCPK:SCGLF) –Viability Rating a+.

Fitch considers the potential for these negative rating actions to be warranted by the structural challenges these firms’ business models face. These challenges stem from intensified regulation, heightened funding costs, intense competition to remain a top tier player, and changing risks in an industry of constant and rapid innovation and interconnectedness with developments in the rest of the industry and the global economy.

In a Special Report, Rating Banks in a Changing World, Fitch summarizes its view on several high-level themes that continue to affect banks and their ratings. Such themes include the macroeconomic environment and sovereign context, the evolving regulatory regime, changing support frameworks as well as the evolution of bank business models in light of these and other factors.

Although some of the themes will manifest themselves over an extended period of time, the collective impact of these factors implies revised ratings for some banks, particularly large and currently highly rated ones. From the report:

In Fitch’s view there will be fewer banks globally whose credit profiles are consistent with Issuer Default Ratings (IDRs) in the ‘AA’ rating category or above, and more whose profiles are consistent with the ‘A’ category.

Global universal banks and investment banks, with their relatively greater exposure to capital markets operations and reliance on (short-term) wholesale funding, are particularly affected although tensions also exist in other markets.